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United Insurance Holdings (NASDAQ:UIHC)
Q4 2019 Earnings Call
Feb 20, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the United Insurance Holdings fourth-quarter and year-end conference call. [Operator instructions] And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Adam Prior of The Equity Group. Thank you, sir.

You may begin.

Adam Prior -- Investor Relations, The Equity Group

Thank you, and good afternoon everyone. Thank you for joining us. You can find copies of UPC's earnings release today at www.upcinsurance.com in the Investor Relations section. In addition, the company has made an accompanying presentation available on its website.

You're also welcome to contact our office at (212) 836-9606, and we'd be happy to send you a copy. In addition, UPC Insurance has made this broadcast available on its website. Before we get started, I'd like to read the following statement on behalf of the company. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of federal securities laws, including statements relating to trends and the company's operations and financial results and the business and the products of the company and its subsidiaries.

Actual results from UPC may differ materially from those results anticipated in these forward-looking statements as a result of risks and uncertainties, including those described from time to time in UPC's filings with the Securities and Exchange Commission. UPC specifically disclaims any obligation to revise or update any forward-looking statements whether as a result of new information, future developments or otherwise. With that, I'd now like to turn the call over to Mr. John Forney, UPC's chief executive officer.

Please, go ahead, John.

John Forney -- Chief Executive Officer

Thanks, Adam. This is John Forney, president and CEO of UPC Insurance. With me today is Brad Martz, our chief financial officer. On behalf of everyone at UPC, we appreciate your taking the time to join us on the call.

As a reminder, we are now publishing an investor presentation in conjunction with our earnings release. You can find it on our website, and I encourage you to review it. While we will not be going slide by slide through that presentation, we will refer from time to time to some of the data and analytics included therein. 2019 was a tough year for our company, and Q4 epitomized that.

Unusually high non-CAT severity on fire and liability claims, almost triple the levels from last year's Q4, hurt our results. See Slide 5 of the investor presentation to see what an outlier Q4 2019 was in that regard compared to the two prior Q4s. Also suppressing results in Q4 was a decision we made to significantly strengthen our CAT and non-CAT reserves for 2019. See Slide 10 of the investor presentation, which shows that our year-end reserves are up almost 52% from 2018.

This much more conservative approach to 2019 reserving minimizes 2020 reserve risk, and the measures we took in previous quarters during 2019 on prior accident years helped us to show zero adverse development in Q4. What we did in Q4 should help that very positive trend continue into 2020. We're starting off 2020 in a very strong position on several important fronts. First, rates.

Look at Slide 9 of the investor presentation. Incremental premium from the many rate actions we took in 2019 is amping up, hitting a $62 million annualized rate in December from policies renewing in that month alone. And this is without any of the impacts yet from our most recent large New York and Florida rate increases, which are just starting to hit renewal policies. Add to that the hardening commercial market, and our rate picture looks bright.

Second, reserves. As I mentioned earlier, our year-end reserves are up almost 52% from a year ago. And our reserving posture overall is much more conservative for both CAT and non-CAT. Look at Slide 11 of the investor presentation to see how much we strengthened 2019 case reserves in addition to adding a lot of IBNR.

With no adverse development in Q4 and much higher accident year 2019 reserves, we are looking to take reserve noise off the table for 2020. Third, reinsurance. As one of the 10 largest purchasers of U.S. property CAT reinsurance in the world with over $4 billion of total limit across our programs, we are in reinsurance buying mode most of the year.

Our team at Skyway Re, our internal reinsurance broker, is the best in the business, and they did a great job on our one-one renewals and have made great progress on our six-one core CAT tower renewal. See Slide 12 of the investor presentation, which shows that over 85% of that program is already placed. We have amazing long-term reinsurance partners, and we look forward to working with them on the remaining 15% of the program. Fourth, the capital.

As Slide 15 of the investor presentation shows, despite retaining almost $400 million of CAT losses in the past few years, UPC's book value per share is down only slightly. The seven-year compounded annual growth rate of 10.8% for book value reflects the long-term strength and anti-fragility of our business model. Our balance sheet is strong, and we will not need to raise capital in 2020 even if we suffered two full hurricane retentions. All of our ratings for our insurance subsidiaries were affirmed in December, so that's why we're optimistic.

With rate increases flowing through, no adverse development plus much stronger reserves overall, a nearly complete reinsurance program and a stable, adequate capital base, we're positioned to compete and thrive in the currently challenging operating environment. 2020 is off to a good start, and we're looking forward to the rest of the year. At this point, I'd like to turn it over to Brad for his remarks.

Brad Martz -- Chief Financial Officer

Thank you, John, and hello. This is Brad Martz, CFO of UPC Insurance. I'm pleased to review UPC's financial results but also encourage you to review our press release, Form 10-K and investor presentation for more information regarding the company's performance. Highlights for the quarter ended December 31, 2019, include gross premiums earned of $347 million, an increase of $39 million or 13% year over year; a loss before income tax of $5.3 million, which compared favorably to a pre-tax loss of $19.4 million in the fourth quarter last year; a net loss of $8.2 million or $0.19 a share that was also better than an $11.1 million net loss or $0.26 a share a year ago.

Our core loss of $15.2 million or $0.36 a share compared unfavorably against a loss of $0.5 million or $0.01 a share a year ago. And CAT losses of $19.2 million or approximately $0.35 a share after tax added over 10 points to the combined ratio. Premiums written for the quarter increased less than 1% from a year ago primarily due to a $14.4 million decrease in assumed commercial E&S premiums. Direct written premiums increased $17 million or 6.3%, with Florida accounting for approximately 60% of the growth year over year, with all other regions also showing modest increases from the same period a year ago.

Ceded earned premiums were 45.7% of gross premiums earned in the quarter, compared to 41.1% last year. The change was due to increased cessions to our quota share reinsurance program, which were $42.8 million or 12.3% of gross premiums earned in the current quarter, compared to just $23.6 million or 7.7% a year ago. Excluding the quota share, the ratio of ceded to gross premiums earned was unchanged from the prior year. Other significant items impacting total revenues during the fourth quarter included unrealized gains from equities of $9.2 million, compared to an unrealized loss of $14.3 million in the same period a year ago and additional income tax expense due to a nonrecurring valuation allowance, which distorted the company's effective tax rate for the quarter and the year.

UPC's fourth-quarter net loss and loss adjustment expense was $130.6 million, an increase of $8.4 million or 7% year over year. This produced a gross loss ratio of 37.6% and a net loss ratio of 69.3%, which included $19.2 million of catastrophe losses. Catastrophe losses were driven by approximately $15.7 million of net retained losses primarily from Tropical Storms Olga and Nestor plus three new PCS events in the quarter, with the remainder stemming from increased retention under our aggregate reinsurance program. Underlying loss and LAE was $111.4 million, up $39.5 million or 55% year over year.

This resulted in an underlying gross loss ratio of 32.1%, which compared unfavorably to 23.3% a year ago. As John mentioned, the unusually high loss severity from fire and liability claims were the primary driver of the deterioration. But the underlying non-CAT losses were also impacted by significant reserve strengthening during the fourth quarter as we sought to mitigate the reserve risk on accident years 2019 and prior in future periods. UPC's operating expenses were $82.8 million, an increase of $7 million or 9% year over year.

The increase was driven primarily by policy acquisition costs, which rose $10.1 million due to growth in premiums. The remaining $3.2 million decrease was driven by a reclassification of certain general and administrative expenses to loss adjustment expense, which also contributed to the increase in underlying loss and LAE for the quarter. Our gross expense ratio was 23.9%, a decrease of nearly one point from the prior year. On the balance sheet, UPC ended the year with total assets of just under $2.5 billion, including cash and invested assets of approximately $1.3 billion, an increase of 14% in our liquidity year over year.

The duration of our fixed maturities remained at 3.4 years with an overall composite rating of A+, and our investment portfolio produced a total return of approximately 8% during 2019. Shareholders' equity attributable to UIHC stockholders was approximately $503 million with a book value per share of $11.69 or $11.43 excluding unrealized gains. I'd now like to reintroduce John for some closing remarks.

John Forney -- Chief Executive Officer

Thank you, Brad. We're certainly not happy with the results we produced in 2019, but we are pleased that the multiple rate actions we've taken are starting to show up in a material way in our financial results, that we were able to show no adverse development in Q4 while strengthening our reserves for accident-year 2019 and minimizing reserve risk in 2020; that our reinsurance program for June 1 is 85% done at this point, which lessens the probability of material price increases impacting our financials; and that our capital is in good shape with no need to raise capital and all of our ratings having been affirmed recently. We're ready to have a good year in 2020. I'm sure you're ready for that too.

We appreciate your interest in UPC, and we'll be happy to take any questions you have at this point.

Questions & Answers:


Operator

[Operator instructions] Our first question is coming from Elyse Greenspan with Wells Fargo. Please proceed.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi. Thanks. Good evening. My first question was hoping to get a little bit more color on the underlying losses in the quarter.

I guess two parts. First off, were the higher, I guess, fire and liability losses you pointed to, was that throughout the different states or more confined to Florida or some other geographic location? And then my second question related to that would be, you mentioned strengthening accident-year 2019. Can you just give us a sense of how much strengthening and how much of the losses in the current quarter were for strengthening related to the prior three quarters of 2019?

John Forney -- Chief Executive Officer

Sure, Elyse. This is John Forney. I'll start. The fire and liability losses we saw, which, if you look at that investor presentation, were just a huge outlier compared to the prior Q4s and were spread throughout the states, there wasn't any particular pattern to it except that there were a series of unusually large losses throughout the quarter.

And the second question on the amount of strengthening, I'll let Brad take that.

Brad Martz -- Chief Financial Officer

So on the non-CAT side, on Page 10 of our presentation, you can see the total change in net loss and LAE reserves year over year was approximately $67 million. And about $32 million of that was in the fourth quarter.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. That's great. And then in terms of, I guess you guys had pointed to, right, there was a catch-up for the other three quarters. And then obviously, it sounds like you expect some of the fire and liability losses to normalize going into 2020.

Based on the rate increases that you have coming into your book, can you just give us a sense of how you would expect the underlying loss ratio to kind of trend through 2020 versus 2019?

Brad Martz -- Chief Financial Officer

I guess we can start by saying we absolutely don't expect the same level of loss severity when it comes to loss costs for the quarter were an anomaly for those two causes of loss. Generally, December and January are difficult loss months. Just so happened that December was unusually high this period compared to the same periods a year ago.

John Forney -- Chief Executive Officer

But I will add that we have not seen those extreme trends continue into 2020.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. Did you guys see any change to your Hurricane Irma gross loss estimate in the quarter?

John Forney -- Chief Executive Officer

Not since we last communicated with investors about that, no -- no year-end change.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. Great. And then just two numbers questions. Brad, I think you usually give us the surplus as of the end of the quarter.

Do you have that number?

Brad Martz -- Chief Financial Officer

I don't have that. Those will be available on or before March 1 when the annual statements are filed.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. And then you mentioned that there was like a one-off tax catch-up, I think it's what you said. Can you just give us the amount? And then as we think about modeling, what should we think about as kind of a tax rate assumption in 2020?

Brad Martz -- Chief Financial Officer

The tax rate guidance is really unchanged at about 23% as a blend of the federal and state rates. The amount for the fourth quarter was driven by a net operating loss in our BlueLine operation. We've got three different separate accounts that have filed 953(d) elections to the IRS. It gets super complicated, but dual consolidated loss limitations prohibit us from potentially utilizing some of the net operating loss in one cell that has been put in runoff, which is the contributor to the decline in the assumed written premiums for the quarter.

And we talked about that, that quota share with Lexington being put in place in a runoff last quarter.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. That's helpful. Thank you.

John Forney -- Chief Executive Officer

Thank you, Elyse.

Operator

Our next question comes from Marcos Holanda with Raymond James. Please proceed with your question.

Marcos Holanda -- Raymond James -- Analyst

Hey, guys. Thanks for taking my question. I just had a big macro question, big picture. Can you guys give us a sense of what you've seen trend in commercial E&S market and maybe remind us of what UPC exposure is in there?

John Forney -- Chief Executive Officer

Sure. The commercial E&S market is that assumed premium that we always delineate in our earnings release. And that's with arrangement with several carriers that write that portion of that business through AmRisc, which is the big wind MGA that is owned by BB&T that we've been doing business with for a long time through American Coastal, which is their admitted market company, but they have several other surplus lines company, and we do a quota share with some of them to assume some of their pro rata share of their book with AmRisc. It's very good business.

AmRisc has been the premier writer of that business since their inception in the year 2000, with combined ratios in the 50s and 60s cumulative to date, including all CATs. So we have supreme confidence in AmRisc's underwriting ability and their proven track record. And we have seen evidence here in the second half especially of 2019. And that commercial E&S market is hardening, and we believe that, that business is going to be quite good in 2020.

Marcos Holanda -- Raymond James -- Analyst

OK. Great. And just another one on reinsurance, and you guys have 85% of it locked down before the June 1. But, I mean, could you just give us a sense, what kind of sort of price volatility you expect heading into that renewal?

John Forney -- Chief Executive Officer

As we said, we've got 85% of it done. We have long-term reinsurance partners. They're committed to a win-win relationship with us, one of the biggest buyers of U.S. property CAT reinsurance in the world.

So people take a long-term view when they trade with us. And we have really win-win relationships and win-win renewals that are fair to us and fair to them. And we never have talked about what that means from a percentage increase, but we certainly expect that it's going to be very manageable for us given everything that's happened already.

Marcos Holanda -- Raymond James -- Analyst

Got it. And just lastly, I mean, can you just give us a flavor of what these fire liability claims look like? What's the average cost and just some more color there.

Brad Martz -- Chief Financial Officer

Well, Page 5 of the investor presentation gives you the loss severity. So that's your average cost at least for the quarter, as well as the previous four quarters. So fire losses obviously can be very, very low frequency but very high severity. And with homes burning a lot quicker today than maybe in years past, with new building materials, plastics, other things, I think the entire industry has seen loss severity for fire increase.

Operator

[Operator instructions] The next question does come from Matt Carletti with JMP. Please proceed. Matt, your line is live. You can proceed with your question.

Matt, as a final reminder, your line is live. You may proceed. Thank you. [Operator instructions] Our next question is coming from the line of Ron Bobman with Capital Returns Management.

Please proceed with your question.

Ron Bobman -- Capital Returns Management -- Analyst

Hi. Good afternoon. I had a question about Florida rate filings and if you have one pending, what the size of it might be?

John Forney -- Chief Executive Officer

We filed one several months ago. That was a file-and-use of 13.4% for the product that we're writing with in Florida. We've implemented that. And so that was just within the last couple of months that we've gotten it programmed into our system, so we're just starting to see the first renewals go out with that 13.7% in there.

And we're doing rate indications for the states like Florida where we have a big presence that have had some problems here recently on a monthly basis, and so we're going to stay on top of it. We think this rate increase will help us quite a bit especially with some of the other repositioning we've done in the state of Florida, Ron, which includes a lot of nonrenewals and closing of certain areas that just have been problematic in terms of the loss ratio. So we think we're positioned well, but we are monitoring it like a hawk to make sure that we're getting the rate that we need in what's been a very challenging state.

Ron Bobman -- Capital Returns Management -- Analyst

Yes. Relatedly, John, the 13% that you mentioned, does that include a portion attributable to your increased reinsurance costs or is that something separate and apart from the 13%?

John Forney -- Chief Executive Officer

Yes. We did not have justification to file an increase for reinsurance costs. So we didn't do that because it wasn't needed based on how our placement came in last year.

Ron Bobman -- Capital Returns Management -- Analyst

Thanks a lot. Gotcha. All right. Best of luck.

John Forney -- Chief Executive Officer

Thank you.

Operator

We'd now like to turn the floor back over to management for any additional concluding comments.

John Forney -- Chief Executive Officer

Once again, we appreciate everybody's interest in UPC. We're working hard to make 2020 a year that we can all be proud of, and we look forward to talking to you on future calls this year. Thanks again for your interest.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Adam Prior -- Investor Relations, The Equity Group

John Forney -- Chief Executive Officer

Brad Martz -- Chief Financial Officer

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Marcos Holanda -- Raymond James -- Analyst

Ron Bobman -- Capital Returns Management -- Analyst

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